The ICO is Dead, Long Live the DAICO
A lot has been said about the DAICO as a concept, and how it possibly could look like. However, how it could and will turn out is something that hasn’t been talked about a lot yet. This article discusses a few issues from a governance and legal point of view. Questions like “what benefit does it have”; and “what kind of challenges would we face” and “how to make it work” will be addressed.
The authors are both active as advisers in the blockchain and crypto space, have a proven track-record in the community, and have both academic credentials (corporate governance, and legal expertise in crypto, blockchain, and ICO’s).
Dr. Hans Koning: LinkedIn
Dr Davis Meszaros: LinkedIn
THE ICO IS DEAD, LONG LIVE THE DAICO?
What is a DAICO?
To understand what a
is, we have to approach the question from two sides. It is the combination of arguably one of the biggest game changers of the past few years, the so-called ‘initial coin offerings’ or ICO’s short and the idea of a ‘decentralized autonomous organization’ or DAO short.
As the former, these campaigns offer a fundraising mechanism, which is oddly similar to the well established initial public offering that has investors purchase shares of a company, thereby raising capital for it. Equivalently, an ICO is supposed to carry out the same task, except for using cryptocurrencies – such as Bitcoin or Ethereum – instead of traditional currencies.
On the other hand, the DAO represents a certain paradigm shift with its exciting legal and business implications. The concept is truly astonishing, a company purely online, without a physical address, the board of directors or even employees, that runs on the Ethereum blockchain and exists as a series of smart contracts. The biggest benefit to all of this, is that it eliminates the potential risks of fraud, corruption or simply human negligence and leaves the decision making to the codes and the investors without any intermediaries.
If we combine those aforementioned and incorporate aspects of the DAO into the mechanism of ICOs, then we get the upgraded and more secure method of fundraising, the DAICO. This combination allows for ICO projects to raise funds for their ideas, while investors can rest assured that their contributions are safe. The DAICO, or Decentralized Autonomous ICO, was recently popularized by Vitalik Buterin (founder of the Ethereum network). Buterin thinks that the cost of using Ethereum can be reduced while at the same time a stronger emphasis is placed on developer results.
What’s the added benefit?
Due to the lack of control, often zero transparency and no accountability from the promoters side, ICO’s are an imperfect model, to say the least. Although the whole concept of autonomous decentralization is based on trust, certain components in the setup of the company are a stone’s throw away from that. Contributors need to be cautious about which decisions they can leave to a centralized team. Not only because of developer results, but also due to the fact that usually there is a huge amount of money at stake. A great many projects abused this trust and managed to get away with an incomplete or fraudulent project, essentially stealing (deliberately or not) the funds in the process.
DAICO’s attempts to fix this with three simple steps. First of all, the already mentioned decentralization – a very popular term in blockchain circles – prevents the developers from making arbitrary decisions related to the project or the investors’ money, thereby eliminating the risk of having to rely on a centralized team. In turn, the concept also involves the implementation of a voting system, which would further increase the safety of the project.
Secondly, funds would not be available all at once, but rather release over time as certain milestones are met. This is a so-called tap mechanism that allows investors to control the flow of capital allocated for the coin offering. Alternatively, the system can be pre-programmed in such a way that it automatically releases certain amounts with either the passage of time, milestones reached or other conditions met. This way the rules of engagement are already set prior to the investment, therefore compliance is addressed beforehand, not afterward.
Last, but not least, the investors can decide to refund the contributed money in case the project seems to have gone awry. Depending on the various types of DAICO’s that we are going to see, this can mean just the remaining, untouched funds or perhaps even more than that. In any case, the whole idea is based on the ‘wisdom of the crowds’ as Vitalik put it.
One of the most frightening and representative examples is the case of the Tezos ICO from June 2017. Just in a matter of days, they amassed a whopping $232 million US dollars. This alone already made it an incredibly successful venture, but considering that the funds were raised in BTC at ‘only’ $2,500 US dollars, those funds are now worth considerably more.
Today, almost a year later, Tezos has yet to announce if and when they will launch, what the status of the technology is or how the funding panned out, not to mention other major issues. They show a massive lack of transparency and communication, lawsuits are being filed against them, and their board members are being replaced from time to time. Due to the volatile, uncertain and unregulated nature of ICO’s, this was all possible, and Tezos managed to raise a fortune without any mechanism in place that would allow investors to have a saying in how and when their money is spent. Had it been a DAICO instead of a regular ICO, the majority of these issues could have been avoided. Contributors could hold the project leaders accountable, ask for a refund and have better oversight of the whole ICO in general.
Although this scheme is a lucrative one – especially for investors – it poses several legal issues due to the voting system and the heavy, direct interaction between investors and the project, rendering the DAICO’s tokens most likely a security and thereby opening up to potential issues with regulatory authorities, such as the SEC.
The clever methods seen on the market, such as the issuance of ‘utility tokens’ in order to bypass the securities registration requirements or simply registering the companies as non-profit organisations (whereby a considerable amount of tokens are still retained for the advisory board), would fall short of the promoters expectations in case of a DAICO. Not only the mere existence of the voting system, but the fact that the success of a DAICO hugely depends on the results of these decisions already means that the investors are likely to be considered shareholders and the tokens would be classified as securities in many jurisdictions.
An initial solution to this would be to limit the participants to ‘accredited investors’ in the US and their corresponding counterparts in other countries.
The above is (un)fortunately only the tip of the iceberg when it comes to the challenges associated with this concept. If we assume that the DAICO will function as a company and the investors will be its shareholders, then we immediately have to consider corporate taxes and corporate governance, not to mention all the issues related to a potential bankruptcy and custodial responsibilities.
Further questions involve the matter of the applicable law and forum (for seeking legal remedies) and the holding and voting rights of the tokens (as shares of a company), especially when the project has been listed on exchanges.
To make it work
The DAICO could serve as a compromise between the hunger of the market and the need for regulation of authorities from all around the globe. With the elements listed above, we can steer the evolution of ICO’s into a secure and transparent valley, where investors and project leaders can all be satisfied, all the while, the watchful eye of the law is not poked every time someone says ‘utility token.’
One of the crucial changes has to do with the token holders themselves. A realization has to happen, whereby tokens are no longer considered exclusively as a “get-rich-quickly scheme” but rather as a statement, an endorsement for that specific blockchain application. That shift is as much needed as it is imminent, and will become more pronounced once cryptocurrencies and blockchain technology, in general, are even more commonly accepted in the world. The DAICO is an excellent way of addressing and subsequently introducing both governance and legal control to the wild west of cryptocurrencies.
That necessary change – or better said the drive for it – should come especially from within the blockchain and crypto community, not from regulators. With blockchain technology, we have something precious that propels us to a great and brave new world. That comes with great responsibility; a responsibility we feel we can, will, and want to rise to.
ABOUT THE AUTHORS:
Both Hans Koning and David Meszaros have been involved in the Blockchain and crypto community for a few years. They have been and are advisers to coin offerings, and often work as a team, adding value to the venture, and steering them through the challenges that are faced through the various development stages. Subsequent involvement as Board member is something that quite often results. They both understand the value of governance and legality, and feel it is important not to simply comply, but moreover take a pilot role. The analogy with the “Wild West” has been made when taking about ICO’s and both Hans and David feel they need to, but even more so, want to explore, chart and guide.
Dr. Hans Koning TIIM: LinkedIn | | Twitter
Dr Davis Meszaros LLM: LinkedIn